Table of contents

What is Human Capital?

Capital is usually thought of only as tangible machines and factories or the shares and bonds owned. Human capital and its importance are usually ignored. Human capital can be defined as all the capabilities and capacities possessed by humans individually or collectively. It comprises of all education, health or skills that all the individuals own. It is similar to any other form of capital. For instance investment in human capital is made through education, health, training, benefits and perks.

Investment in human capital is a pre-requisite for development and innovation.Having a good human capital along with the physical capital is aim of every firm. It is said that the quality of a firm’s human capital has an important role in defining it.

Human Capital Types

Considering the importance of human capital in today’s economy, human capital has been divided into two categories:

Specific Human Capital:Specific human capital may refer to skills and knowledge which are essentially specific to an organization or firm. For instance: training of workers for some software X used only in ABC Ltd. will be productive for that worker only in firm ABC. Outside that firm, it is of no use. This will lead to increase in productivity of the worker/ laborer but only for that organization or firm. It will not be fruitful elsewhere

General Human Capital: General human capital refers to that set of knowledge and skills which are used by many employers and are as such general in nature. For instance having the knowledge of monetary policy is sought in every economist or every heart surgeon has the general knowledge of heart transplant. In this way this type of human capital is not specific to a firm or organization.

Human Capital Management

Human capital management (HCM) may refer to an approach of human staffing which looks upon human capital as something whose both current and future value can be assessed. It basically aims at increasing the productivity of human capital and thus leading to increase in expected future value of human capital. It is mostly related with managing the employed workforce. It is based on the concept that the workforce of an organization comprises of people who are more than just labor.

Importance of Human Capital Management:

Helps in retaining workforce.

Trains the workforce and thus helps generate more profits.

Help the human recruitment department in talent acquisition.

Making the workforce self sufficient.

Human Capital Index

Human development index is a statistic made from the composition of income, education and expectancy. A higher HDI implies higher life expectancy, higher education levels and higher per capita incomes.

HDI can be calculated as follows:

Firstly, we calculate the Life Expectancy Index (LEI):LEI= Life Expectancy-20/85-20LEI= 1 when Life expectancy at time of birth is 85 and LEI= 0 when Life expectancy at time of birth is 20.

Secondly, we now calculate theEducation Index(EI)EI= MYSI+ EYSI/2Where, MYSI is Mean Years of Schooling Index (MYSI)And EYSI is Expected Years of Schooling Index (EYSI)

Lastly we calculate HDI on basis of above three. The HDI is thegeometric meanof the three normalized indices calculated above:HDI= ∛ (LEI.EI.II)

Human Capital Importance

The human capital is and will be of very high importance till artificial intelligence developed fully. It is more important in labor surplus countries as they are more dependent on labor for production. The importance of human capital becomes clear with the fact that it takes human capital to make other forms of capital. A strong economy requires deep knowledge, high end skills and information which only human capital can provide. It is only human capital which has the capacity develop, deploy and create talents.

Human capital has more importance today because of changed approach of United Nations towards human capital. They publish a human development report based on various countries in order to see human development in those countries.

Thus is there no doubt that human capital is the backbone of an economy and is a pre-requisite for human development.

Human Capital Risk

Human capital risks are said to be the biggest threat to a firm. They refer to any type of hindrance that may be created by an employee’s the organization. It can hinder performance of an employee as an individual or collectively as an organization. It can be clearly observed when an organization is seen performing below attainable levels. For instance, if a firm can produce 20,000 units of the good but produces only 11,000 given all the physical capital. The error is bound to have come from human capital. Risk can be easily assessed by the HR activities.

Human capital risks can be primarily categorized in following categories:

Absence Activitiesthese may include the absence of employee from the workplace. The absence can be statutory absence (which cannot be controlled such as sick leaves) or controllable absence.

Collaborative Activities refer to spending of time between two or more employees which is within the organizational context. Examples: meetings, instructor led training etc.

Knowledge Activitiesrefer to time expenditures done by a single person such as research, blogging, email etc.

Process Activities are a mixture of collaborative and knowledge based activities that arise out of organizational context. Examples: manual data transformation, politics etc.

Importance of Human Capital Investment

Investment in human capital is bound to be productive. Investment can take place through education, health, and training or in any other productive form. Many studies in United States have shown that higher education raises the expected income of that person. This is what investment in human capital does. It raises the person’s value. For instance, a healthy person is bound to have more expected income than one who is not.

Investing in human capital is the key to sustainable development of a firm. Investment, for instance, is made once for training of an employee but he works with more productivity for longer durations. Thus the returns net of the cost of investment are positive. When a employee is provided training, he becomes more of an asset.

Investment in human capital is an ongoing process. This means that it is a process which never ends.